Protecting the investor in case of a failure

27.09.2010 (All day)

Two European directives are on the way which will have a deep impact on the finance industry. Broadly, the objectives of these two directives are to improve protection for bank account holders and retail investors and to meet the need for new legislative frameworks for alternative investment funds. What impact will the directives have on the Luxembourg financial centre? LFF spoke to Antoine Kremer, the lobbyist who represents the Luxembourg financial centre in Brussels.

Negotiations are underway concerning the AIFM Directive. Are you confident an agreement will be reached during the Belgian Presidency in time for the September vote in the European Parliament?

Negotiations between the European Parliament, the Council and the Commission have been difficult since the first so-called trilogues began in May this year. A limited number of obstacles still exist and on 22nd of September the European Parliament decided to postpone the AIFMD to the second October plenary session. Nevertheless, most people believe that an agreement will be reached in October or at the latest in November.

Why was the adoption postponed? What is the crux of the matter?

In particular the Parliament and the Council have adopted very different approaches to issues like the treatment of third country managers or third country funds. Indeed, whereas the EP suggests the creation of a more harmonised European framework where third party managers could be given a European passport to market their funds or services in Europe, the Council prefers a system based on national private placement regimes where the passport would only be given to EU managers and funds. Disagreement also persists on the specific requirements regarding private equity.

Luxembourg will be required to implement this Directive. What new opportunities do you see for the financial centre?

The Luxembourg financial center with over 2 000 billion euros in assets under management is the largest investment fund center in Europe, second only to the US internationally. Roughly a fifth of these AuM are invested in Luxembourg alternative investment funds.

Clearly it has critical mass and is a center of reference that by its size attracts investment funds. And with vehicles like the SIF Luxembourg has flexible regulated instruments to offer that in the last few years have clearly demonstrated their attractiveness with fund promoters and investors.

Furthermore, the AIFM Directive offers the possibility of a passport for EU funds and managers. This means that, for example, a Luxembourg fund managed by a Luxembourg or UK management company can be sold without any obstacles in all 27 Member States.

The UCITS passport has been the foundation of the success of the Luxembourg investment fund center. I am convinced that the AIFMD will only strengthen the financial center as well.

What are the potential risks looming for Luxembourg?

The Directive is new and brings changes. These changes require that the financial center adapt to them and make the most of the new legislative framework. At one point, there was a risk that third country funds would be able to enter EU markets without having to apply the same strict regulations EU funds face under the Directive.

This would clearly mean a competitive disadvantage for local funds. For the moment ALFI seems to have been largely heard by the European Parliament, the Council and the Commission according to the latest texts on the table. But as negotiations are ongoing, ALFI remains very vigilant on the matter of the necessary level-playing field.

Furthermore, depositary banks are facing new and potentially costly challenges with the responsibility regime of the Directive. These challenges will be faced by other EU jurisdictions as well and will have to be seen together with the above-mentioned opportunities that the Luxembourg financial center will reap from the Directive.

It is expected that the Directive will speed up the migration of alternative investment funds to onshore domiciles: a Godsend for Luxembourg?

Since the financial crisis broke out in 2007 and the more recent G20 meetings, there is a clear trend towards regulated products and onshore jurisdictions. Luxembourg clearly meets these criteria and we have seen a flow of alternative investment funds to Luxembourg.

Again, this is due to the existing SIF and SICAR vehicles, and also to the excellent reputation Luxembourg enjoys with professionals from the investment fund industry all over the world.

Another topic is the Commission’s proposals to boost consumer protection. Improving protection for bank account holders and retail investors is the key. How can protection of savings be improved?

In July this year the European Commission adopted two proposals for a directive: one on depositary guarantee schemes and the other one on investor compensation schemes. Both texts aim at protecting the investor in the case of a failure. The legislative proceedings are at a very preliminary stage both at the level of the Council and the European Parliament.

Which deposits and depositors will be protected?

The proposal for a Deposit Guarantee Scheme (DGS) covers all physical persons as well as non-financial companies up to the amount of 100 000 euros. This includes deposits in non-EU currencies like for example the USD.

What about a pan-European Deposit Guarantee Scheme?

A pan-European DGS might have some interesting features, but it is currently not seriously under consideration given the opposition from many Member States to such a solution. For the moment, a network of national DGS seems to be the only feasible policy option.

What is the impact of the Deposit Guarantee Scheme on Luxembourg Banks?

It should be remembered that after the troubles experienced by the Kaupthing, Glitnir and Landsbanki groups and therefore their subsidiaries in Luxembourg, the AGDL (the local DGS) had to reimburse depositors. Therefore the AGDL is already in the process of transforming its internal provisioning system to an ex ante one, which will allow the creation of an independent buffer.

Furthermore, the Commission’s legislative proposal raises the covered amount per customer from 50 000 to 100 000 euros. This means that the amount banks will have to earmark or contribute in the coming years will rise significantly. This comes on top of the costs of higher capital requirements from Basel III, potential bank levies and financial transaction taxes and costs stemming from increased responsibilities for depositary banks. CW